26 February 2018

Financial Times: US plan to roll back bank insolvency rules is fake deregulation

That seemed to change last week when the Treasury weighed in on one of the most heated debates in Congress: whether ex-President Obama’s tome of post-crisis regulation should be repealed. Or at least whether its “resolution” rules, for many Republicans one of the most hated elements of the legislation, should be dropped.

The resolution rule book — introduced as part of a globally co-ordinated approach to winding down big insolvent banks — was key to efforts to end the “too-big-to-fail” issue that led to mass bank bailouts in 2008. As important as they are arcane, they are a linchpin of the world’s approach to regulating global banks.

Hardline Republican reformers, such as House financial services committee chairman Jeb Hensarling, have led the repeal drive. They dislike two main things about the resolution rules. They think the global agenda amounts to foreigners interfering with US rule-setting. And they are convinced that resolution allows for state bailouts by another name.

But the proponents of reform do have some valid points. As Ryan Dattilo, counsel to the Senate Judiciary Committee, has indicated, regulator-run resolutions can be obscure. He cites the European example of Spain’s Banco Popular, still mired in legal action from furious bondholders wiped out with no notice and scant transparency.

On the face of it, the Treasury paper endorses the reformers’ agenda.

It says insolvent bank wind-downs should be run by bankruptcy courts, not regulators, with a new category of Chapter 14 bankruptcy created to cater for the quirks of banks. And it says emergency state liquidity injections would only rarely be available, supported by “high-quality liquid asset” collateral. “We will not tolerate taxpayer-funded bailouts,” said Treasury secretary Steven Mnuchin.

Such a radical break with the status quo — and with global norms — looks concerning on at least three grounds.

First, depriving a systemically important bank of access to funding would seem incompatible with orderly wind-down. It is obtuse to imagine that a bank on the brink of failure would be awash with HQLA collateral. If it was, it could have secured funding from other banks.

Second, a generalist judge is unlikely to be as effective as a specialist banking regulator in winding down a bank over a weekend, keeping faith with customers and other backers. Court decisions could easily be challenged.

Third, breaking with the global approach could backfire for the big US banks, because regulators abroad could then seek to impose stricter rules.

Full article on Financial Times (subscription required)

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